Is Iceland loonie to start using Canada's currency?

Is Iceland loonie to start using Canada's currency?

Iceland appears to be increasingly open to adopting the Canadian dollar as its official currency, but why the loonie? The Post‘s Tristin Hopper investigates:

What’s wrong with the Icelandic kroner?
To quote University of Iceland Economist Arsaell Valfells, “the Icelandic krona is history.” While the U.S. government was drawing up bank bailouts in 2008, Iceland’s three largest banks just straight-up collapsed. In proportion to Iceland’s small population of 300,000, it was the largest banking collapse in history. High unemployment, waves of private bankruptcies, a government turfed out of office — the end result was that Icelandic currency became much, much less desirable. Imagine if Canadian Tire suddenly fired their senior management, closed half their stores and announced that instead of tools and housewares, they were only going to sell expired baby food. Suddenly, that glove compartment full of Canadian Tire money would not seem nearly as valuable, would it?

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Has anyone tried this before with the Canadian dollar?
Not really. Although, throughout the 20th century Canada has looked at annexing Turks and Caicos Islands as a province, which would involve shipping at least a few million loonies to the tropical islands. The thing is, up until lately the Canadian dollar has not been much to sniff at; it was only 2002 when a loonie only bought US62¢. The difference now is high-commodity prices. Demand for raw materials is on fire, and Canada just happens to be filled with trees, potash, metals and two trillion barrels of Alberta oil. Last month, Ontario premier Dalton McGuinty even disparaged Canada’s high “petro-dollar” with wiping out his province’s manufacturing sector.

Why not the Euro — or the U.S. Dollar?
After stubbornly holding out for years, Iceland finally applied for EU membership in 2009, presumably in a bid to start stuffing its cash registers with good, stable Euros. But after a steady cascade of debt crises, Iceland could be forgiven for changing their mind. Estonia became the latest country to join the Euro in January, 2011, and immediately found themselves sitting in on Greek bailout meetings. The U.S. dollar, the premiere choice for foreign currency since the Second World War, has also lost a bit of its lustre amid their own debt wrangling. And lest you think the krona could still bounce back, Icelanders themselves have pretty much written-off their 80-year-old currency. “The choice is between surrendering the sovereignty of Iceland in monetary policy by unilaterally adopting the currency of another country or become a member of the EU,” Prime Minister Johanna Sigurdardottir said in a speech this week.

What does Iceland gain?
Credibility. Currently, if a French fish dealer wants to buy some Icelandic blue whiting (one of the country’s largest exports) they would first have to call up a currency exchange and get their hands on a few thousand Euros worth of Icelandic krona. Not only is it inconvenient to track down krona, it is also extremely risky — just think of all the fish buyers who got stuck with bank accounts full of rapidly-devaluing krona in 2008. It’s like opening a fruit store where the cashiers only accept payment in high-priced baseball cards. Few consumers would be willing to take on the risk of a baseball card collection just to pick up some bananas.

What does Iceland lose?
Complete domestic control over its monetary policy. Iceland would not just have to refit its vending machines to accept toonies, it would have to go along with interest rates, 2%-3% inflation and all the other services provided by the Bank of Canada. Our central bank would effectively become the Bank of Canada and Iceland — but with one major difference: Bank of Canada governor Mark Carney would not spend a single second worrying about what some volcanic island thinks about our monetary policy. Iceland wants some inflation to reduce unemployment? Tough luck. Maybe a lower interest rate to stimulate investment? Get lost.

Trusting a foreign government to control your monetary policy? Who does that?
As of this writing, there are almost as many countries using foreign currencies than there are countries with IKEA franchises. A U.S. dollar won’t just buy you a Coca-Cola in all fifty states, but also in Liberia, El Salvador, Panama, Micronesia and the Marshall Islands, among others. Plenty of France’s former African colonies use Euros — or have pegged their domestic currencies to the Euro — while several tiny Pacific Island nations have adopted the pastel-coloured dollars of their Australian and New Zealand neighbours. Or all of the above: In the economic basketcase of Zimbabwe, the domestic currency is so hideously unstable that citizens have adopted Euros, British pounds and South African Rands — as well as the barter system — just to keep their economy moving.

What does the Bank of Canada think of all this?
Canada’s ambassador to Iceland, career diplomat Alan Bones, certainly seems to like the idea. On Icelandic radio earlier this month, he said Canada was “certainly open to discussing the issue.” The next day, the Department of Foreigh Affairs abruptly told Mr. Bones’ Icelandic hosts that the Ambassador would no longer “be speaking on the issue.” The Bank of Canada — and the rest of Ottawa, for that matter — has similarly decided to keep quiet about the plan. Regardless, if Iceland really sets their mind to using the loonie, there is very little we can do to stop them. Cuba, certainly no friend of their U.S. neighbour, nevertheless adopted greenbacks as legal tender throughout the 1990s.